This Wasn't How Europe Was Supposed To Shoot Itself In The Foot...

Although there were rumors of a deposit tax, as a way of bailing out Cypriot banks, the news this weekend has caught many people by surprise.

The idea of a one-off tax is understandably shocking to almost anyone who has a bank account.

It remains to be seen whether Europe has, in the words of JPMorgan "bazookaed itself in the foot" or whether this ends up being a blip. Part of that depends on whether the new measure is actually passed or not (a vote that's now likely going to happen Tuesday).

This wasn't how the European calm was expected to be broken.

What everyone (including myself) expected was that the calm would be broken when a peripheral country finally rebelled against austerity. Recently the most likely candidate for this has been Italy, which had inconclusive elections, and may need to vote again fairly soon to form a new government.

But that's not what happened here. Instead the rich north rebelled, as the Germans and the Finns said there wouldn't be grants (part of it is ideological, part of it is economics, and part of it is is that Merkel is in an election year).

One obvious concern is that folks in other peripheral nations will worry that their bank accounts are unsafe from confiscation, although it seems unlikely that Cyprus would be repeated elsewhere.

A bigger worry should be political contagion. The anger in a country like Italy stems, in part, from the notion that Merkel is calling the shots in domestic politics. Cyprus just reconfirmed how much power Germany has.